The High School Econ. Superpower

Document created by hdrear on May 24, 2016
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            The best personal finance advice I ever received was not advice at all, and it wasn’t even regarding personal finance—it was the concept of “opportunity cost.”  For any who might not know what that is, “opportunity cost” means that in choosing one thing, you discard other possibilities.  Those discarded possibilities are the "opportunity cost" of the decision.  This concept was introduced in my high school economics class and was applied to businesses, but its application is the same for personal finances:  Your resources are limited, so you must prioritize how you spend them.  As the saying goes, “you can’t have your cake and eat it too.”  You can’t spend and save the same twenty dollars, and if you spend all your money on restaurants and clothes, you’ll have nothing left for things like healthcare. 

            Hopefully, everyone has figured out that certain things—rent, loan payments, food, gasoline—will need to take budgetary precedence over all less essential buys.  The struggle really comes with how to spend discretionary income. There are the big questions, like choosing to pay down loans more quickly, replace your ancient car, or save, but what often trips people up without their realization is their failure to recognize that their small expenditures have a collective opportunity cost of larger goals.  It is the innumerable impulse-buy desserts, movie theater popcorns, specialty coffees, library fines—things that did little to enrich their lives and could easily have been forgone—that are preventing them from taking that trip to Europe, or from having a savings pad that allows them to quit their day jobs to focus on a startup.

            No doubt the idea of eliminating unnecessary spending will cause some to cry,  “Why be miserable in the present for the sake of a future that might not happen?” But being mindful of opportunity costs and making wise decisions is not a recipe for misery but rather makes misery less likely, because the smarter your initial decisions, the less regret you incur later.  By not buying convenience food when you’re feeling lazy, you can afford to buy something when you forget to bring your lunch to that all-day seminar.  Using opportunity cost to make wise financial decisions doesn’t mean you can never buy anything that isn’t absolutely necessary.  It allows you to balance the expenses of present happiness with those of building toward future goals.

            That’s what I’m doing anyway.  Weighing opportunity costs helped me save enough money for an amazing trip to Europe, which I instead used to leave a job that was hurting me and move to another state where I’m looking into starting my own business, and I enjoy the occasional ice cream all the more knowing that its infrequency assures me of better things to come.